THE  DISTEIBUTION  OF  SECURITIES  IN 
THE  FORMATION  OF  THE  UNITED 
STATES  STEEL  CORPORATION 


BY 

MAURICE  H.  ROBINSON 


REPRINTED  FROM  POLITICAL  SCIENCE  QUARTERLY 
Volume  XXX,  No.  2,  June,  1915 


NEW  YORK 

PUBLISHED  BY  GINN  & COMPANY 

1915 


THE  DISTRIBUTION  OF  SECURITIES  IN 
THE  FORMATION  OF  THE  UNITED 
STATES  STEEL  CORPORATION 


BY 

MAURICE  H.  ROBINSON 


REPRINTED  FROM  POLITICAL  SCIENCE  QUARTERLY 
Volume  XXX,  No.  2,  June,  1915 


NEW  YORK 

PUBLISHED  BY  GINN  & COMPANY 


Digitized  by  the  Internet  Archive 
in  2017  with  funding  from 

University  of  Illinois  Urbana-Champaign  Alternates 


https://archive.org/details/distributionofseOOrobi 


1 1 ^ C I ^ ^ 


V 


R5&4<i 


THE  DISTRIBUTION  OF  SECURITIES  IN  THE  FOR- 
MATION OF  THE  UNITED  STATES  STEEL 
CORPORATION 

/ 

During  the  period  from  1898  to  1901,  when  the  forma- 
tion of  industrial  consolidations  was  most  active,  com- 
paratively  little  attention' was  given,  either  by  the  pro- 
moters, the  underwriters  or  the  owners  of  the  constituent  prop- 
erties, to  the  important  economic  problems  connected  with  the 
effects  of  the  various  consolidations  upon  the  relative  status  of 
the  parties  in  interest.  In  certain  cases  complaints  were  made 
in  conferences,  and  occasionally  in  the  financial  press,  that  the 
owners  of  important  plants  were  unfairly  treated  in  the  distri- 
bution of  securities,  but  in  general  the  answer  to  such  charges, 
“ If  you  don’t  like  the  terms  you  can  stay  out,”  was  considered 
a sufficient  justification  for  any  plan  that  proved  acceptable  to 
a sufficient  number  of  interested  parties  to  ensure  its  adoption. 

Attention  in  a large  way  was  first  called  to  the  seriousness  of 
the  problem  in  the  Harriman  suit  against  the  Northern  Securi- 
ties Company,  the  Harriman  interests  asking  for  the  return  of 
the  securities  exchanged  for  Northern  Securities  stock,  rather 
than  a pro-rata  distribution  as  proposed  by  the  directors  and 
approved  by  the  stockholders.  After  the  case  had  been  ex- 
haustively argued,  the  Supreme  Court  refused  to  sanction  the 
petition  of  the  Harriman  interests  for  several  reasons — one  of 
them  being  the  difficulty  of  preserving  the  equities  in  the  situ- 
ation between  the  Hill-Morgan  and  the  Harriman  groups  by 
the  use  of  the  direct-return  method.  The  pro-rata  method  was 
approved,  one  of  the  important  reasons  being  that  in  this  way 
all  parties  at  interest  must  of  necessity  receive  an  equitable 
interest  in  the  several  independent  companies  created  by  the 
order  for  distribution.  The  continued  success  of  the  United 
States  government,  acting  through  the  Department  of  Justice 
and  the  courts,  in  forcing  the  dissolution  of  many  of  our  more 
important  consolidated  corporations,  has  given  more  than  an 
academic  interest  to  the  problems  necessarily  connected  with 

277 


POLITICAL  SCIENCE  QUARTERLY  [Vol.  XXX 


278 

the  equitable  distribution  of  securities,  both  in  the  process  of 
formation  and  in  that  of  disintegration. 

Already  the  Northern  Securities  Company,  the  powder  con- 
solidation, the  Standard  Oil  Company  and  the  American 
Tobacco  Company  have  been  disintegrated  and  their  securities 
distributed  by  the  pro-rata  method  on  order  of  the  Supreme 
Court.  A decision  against  the  Harvester  trust  has  been  ren- 
dered and  its  dissolution  is  now  in  process.  The  suit  of  the 
United  States  government  against  the  United  States  Steel  Cor- 
poration, asking  for  its  dissolution,  is  being  expedited  under 
the  law  with  all  possible  speed.  Several  other  cases  are  either 
before  the  courts  or  have  been  settled  without  litigation  by 
conferences  between  the  representatives  of  the  corporations  and 
of  the  government.  Under  these  circumstances  a more  exact 
knowledge  of  the  process  by  means  of  which  consolidations  are 
formed  is  a necessary  prerequisite  to  an  understanding  of  their 
economic  effects  upon  shareholders,  whether  such  aggregations 
of  capital  are  permitted  to  remain  intact  or  are  forced  to  disin- 
tegrate by  order  of  the  courts. 

I 

In  general  there  are  three  fairly  well  defined  methods  in  more 
or  less  common  use  for  the  distribution  of  securities  in  the  for- 
mation of  consolidations.  The  first  in  practical  importance 
may  be  called  the  bargain  method;  the  second,  the  Moore 
method ; the  third,  the  scientific  method. 

When  operating  under  the  first  plan,  the  promoter  provides 
for  a maximum  of  securities  to  be  issued  by  the  central  corpo- 
ration and  then  enters  into  contracts  or  agreements  to  exchange 
the  securities  authorized  for  the  securities  of  the  companies 
which  it  is  hoped  to  consolidate  into  one  company  on  the  best 
terms  possible.  The  more  favorable  the  rate  of  exchange  in 
any  particular  case,  the  larger  the  share  of  securities  which  will 
remain  in  the  hands  of  the  promoter.  Since  some  of  the 
owners  of  the  various  properties  included  in  the  plan  of  con- 
solidation are  shrewder  at  bargaining,  or  more  favorably  situ- 
ated for  independent  action,  it  necessarily  follows  that  those 
thus  situated  invariably  obtain  in  the  distribution  of  securities  a 


No.  2] 


DISTRIBUTION  OF  SECURITIES 


279 

larger  interest  in  the  consolidation  than  the  intrinsic  value  of 
their  plants  would  justify. 

The  Moore  method  was  devised  by  Mr.  W.  H.  Moore  and 
was  used  by  the  Moore  brothers,  W.  H.  and  J.  H.,  in  the 
American  Tin  Plate  Company,  the  American  Sheet  Metal 
Company  and  several  other  consolidations  promoted  by  them* 
during  the  period  of  active  consolidation.  The  first  step  in  the 
Moore  plan  is  to  secure  cash  options  on  all  the  properties  that 
are  considered  desirable  for  the  consolidation,  so  far^  as  such 
options  can  be  obtained  at  acceptable  figures.  A plan  for  the 
financial  organization  of  the  consolidation  is  then  prepared. 
Next,  arrangements  are  made  with  underwriters  to  supply  the 
necessary  funds  to  take  up  all  the  options  at  the  appropriate 
time,  or  such  portion  thereof  as  the  promoter  judges  will  be 
required.  Finally,  each  owner  of  securities  in  the  companies 
on  which  cash  options  are  held  is  offered  cash  or  securities  in 
the  new  corporation  at  his  option.  If  all  the  option-givers 
should  choose  to  take  their  pay  in  cash,  there  would  necessarily 
be  required  large  resources  in  ready  funds  to  ensure  the  suc- 
cess of  the  promoter’s  plan.  Generally,  however,  the  option- 
givers  have  preferred  to  take  securities,  and  the  promoters 
using  this  method  have  so  arranged  their  financial  plans  as  to 
favor  this  inclination.  According  to  the  report  of  the  Indus- 
trial Commission,  it  was  customary  to  offer  each  of  the  option- 
givers  seven  per  cent  cumulative  preferred  stock  equal  in  ^ 
amount  to  the  face  value  of  the  cash  option,  and  a like  amount 
of  common  as  a so-called  “ bonus.”  The  offer  of  the  promoters 
to  give  two  hundred  dollars’  worth  of  stock  instead  of  one  hun- 
dred dollars  in  cash  appeared  so  attractive,  on  its  face,  that  the 
owners  generally  took  the  securities  rather  than  the  cash.  The 
requirement  for  cash  was  thus  reduced  to  a small  fraction  of 
the  values  involved  in  the  deal.  It  was  usual,  as  would  be  ex- 
pected, for  the  promoter  to  issue  common  stock  in  liberal 
quantities,  and  the  total  amount  in  excess  of  the  preferred  was 
retained  in  his  own  hands  as  a reward  for  his  services.  In  the 
case  of  the  American  Tin  Plate  Company,  10/28  of  all  the 
common  stock  issued  was  thus  retained. 

The  third  method,  denominated  the  scientific,  exists  in'  the  ^ 


28o 


POLITICAL  SCIENCE  QUARTMLY  [Vol.  XXX 


world  of  finance  as  an  ideal  rather  than  as  an  actuality^  Briefly, 
it  consists  in  issuing  securities  to  the  owners  of  the  constituent 
properties  in  exchange  for  their  interests  in  such  a way  that 
each  will  receive  his  proportionate  share  in  the  increased  earn- 
ings in  case  of  success,  and  share  also  his  proportion  of  the 
losses  in  case  of  failure.  This  object  is  accomplished  by  issuing 
( I ) preferred  stock  equal  in  face  value  to  the  tangible  assets 
with  such  dividend  rate,  conditions  of  issue  and  of  redemption 
as  will  make  its  market  value  equal  its  face  value,  and  (2)  com- 
mon stock  in  proportion  to  the  surplus  earnings  contributed  by 
each  company  over  and  above  the  requirements  for  the  pre- 
ferred. To  find  the  amount  of  preferred  and  common  to  be  is- 
sued and  assigned  to  the  several  owners,  it  is  necessary  ( i ) to 
make  an  appraisal  of  the  tangible  assets  of  each  of  the  companies, 
keeping  the  results  separate,  and  (2)  to  have  an  accounting  for 
the  purpose  of  ascertaining  the  net  earnings  of  each  of  the 
several  companies,  extending  over  a period  of  years  sufficiently 
long  to  be  representative  of  actual  earning  power.  The  com- 
mon stock  may  be  issued  to  any  convenient  amount,  preferably 
slightly  exceeding  the  preferred,  so  that  control  of  the  corpo- 
rate policy  of  the  central  corporation  will  be  in  the  hands  of 
those  holding  the  contingent  interests.  The  important  questions 
connected  with  the  common  stock  relate  to  its  distribution. 
To  illustrate:  it  is  proposed  to  consolidate  two  companies, 
A and  B,  with  assets  and  earnings  as  follows : 

NET  ASSETS  NET  EARNINGS  RATE  PER  CENT 


A $10,000  $1,500  15 

B . 20,000  2,000  10 


Company  C is  organized  with  $30,000  7 per  cent  cumulative 
preferred  stock  and  $40,000  common  stock.  Stockholders  in 
Company  A are  allotted  $10,000  of  the  preferred  stock  and  the 
remaining  $20,000  is  assigned  to  the  stockholders  of  Company 
B.  The  promoter,  it  may  be  assumed,  will  retain  $10,000  of 
the  common  stock  to  pay  the  organization  expenses  and  as 

^ Mr.  Charles  R.  Flint  used  a modified  scientific  plan  in  the  promotion  of  both 
the  United  States  Rubber  Company  and  the  Rubber  Goods  Manufacturing  Company. 
Report  of  Industrial  Commission,  xiii,  pp.  38,  48;  N.  Y.  Senate  Report  No.  40, 
p.  452  ff. 


DISTRIBUTION  OF  SECURITIES 


No.  2] 


281 


compensation  for  his  services.  The  remaining  $30,000  of 
common  stock  will  be  divided  as  follows : 


NET  REQUIREMENTS  EXCESS 

EARNINGS  FOR  PREFERRED  EARNINGS  COMMON 

A $1,500  $700;;  $800  • $17,143/  ^ 

B . . 2,000  1,400*^  600  - 12,857^ 


$30,000 

Under  this  method  of  distributing  securities,  the  owners  of  the 
constituent  companies  will  share  in  the  earnings  in  case  of  con- 
tinued operation  in  the  same  proportions  as  before  the  consoli- 
dation took  place,  and,  provided  the  promoter  has  been  allotted 
stock  only  for  actual  benefits  conferred  by  his  efforts,  in  the 
same  amounts.  In  case  of  dissolution,  on  the  other  hand,  the 
former  owners  will  receive  in  the  distribution  of  assets  in  pro- 
portion to  the  value  of  the  tangible  assets  contributed.  In 
either  contingency,  the  relative  economic  positions  of  the  par- 
ties at  interest  will  be  maintained  on  a parity. 

II 

The  relative  merits  of  these  three  plans  will  appear  more 
clearly  from  an  examination  of  the  results  which  would  flow 
from  their  adoption  in  the  formation  of  an  actual  consolidation. 
The  United  States  Steel  Corporation  affords  an  excellent 
opportunity  for  such  a comparison. 

This  corporation,  a holding  company,  was  formed  in  March, 
1901,  by  the  consolidation  of  the  following  corporations:  the  . 
Carnegie  Company  of  New  Jersey /the  Federal  Steel  Company/ 
the  American  Steel  and  Wire  C^ompaijy/the  National  Tube 
Company,  the  National  Steel  Company,  the  American  Tin  Plate 
Company,  the  American  Steel  Hoop  Compan;^ and  the  Ameri- 
can Sheet  Steel  Company/  Later  in  the  same  year  the  Steel 
Corporation,  by  an  exchange  of  stock,  acquired  control  of  three 
other  companies : the  American  Bridge  Company,  the  Lake 
Superior  Consolidated  Iron  Mines,  and  the  Shelby  Tube  Com- 
pany. It  also  purchased  outright  a one-sixth  interest  in  the 
Oliver  Mining  Company  and  the  Pittsburgh  Steamship  Com-  - 
pany,  and  the  Bessemer  Steamship  Company.  In  addition  to  < 


282 


POLITICAL  SCIENCE  QUARTERLY  [Vol.  XXX 


the  above  companies,  all  of  which  became  constituent  parts  of  the 
United  States  Steel  Corporation  in  the  spring  of  1901,  the  steel 
corporation  acquired  control  of  the  Union  Steel  Company  in 
1902,  the  Clairton  Steel  Company  in  1904,  and  the  Tennessee 
Coal,  Iron  and  Railroad  Company  in  1907. 

These  companies  belonged  to  two  distinct  groups:  (i)  those 
producing  crude  and  semi-finished  steel  for  the  trade  and  the 
heavier  finished  steel  products,  and  (2)  those  using  the  semi- 
finished steel  for  the  purpose  of  manufacturing  articles  for  more 
direct  consumption.  In  the  former  group  were  the  Federal 
Steel  Company,  the  National  Steel  Company,  and  the  Carnegie 
Company.  In  the  latter  group  were  the  American  Tin  Plate 
Company,  the  American  Steel  and  Wire  Company,  the  National 
Tube  Company,  the  American  Steel  Hoop  Company,  the 
American  Sheet  Steel  Company,  the  American  Bridge  Com- 
pany, and  the  Shelby  Tube  Company.  The  remaining  com- 
panies, acquired  in  the  spring  of  1901 — the  Lake  Superior 
Consolidated  Iron  Mines  Company  and  the  Bessemer  Steam- 
ship Company — were  engaged  in  mining  iron  ore  and  transport- 
ing it  down  the  Great  Lakes  to  the  iron  and  steel  mills  of  the 
Pittsburgh  and  Chicago  districts. 

From  the  financial  point  of  view  the  above-named  companies 
represented,  before  the  consolidation,  five  distinct  groups  of 
interests,  as  follows:  (i)  The  Morgan  group,  including  the 
Federal  Steel  Company,  the  National  Tube  Company,  and  the 
American  Bridge  Company;  (2)  the  Moore  group,  including 
the  National  Steel  Company,  the  American  Tin  Plate  Company, 
the  American  Sheet  Steel  Company,  and  the  American  Steel 
Hoop  Company;  (3)  the  Carnegie  group,  owning  the  Carnegie 
Company  and  its  subsidiary  interests,  including  the  Frick  Coke 
Company,  the  Bessemer  and  Lake  Erie  Railroad,  and  certain 
steamship  lines  and  docking  facilities  on  the  Great  Lakes ; (4) 
the  Rockefeller  group,  owning  the  Lake  Superior  Consolidated 
Iron  Mines  Company,  with  large  holdings  of  iron  mines  in  the 
Lake  Superior  district  and  certain  railway  and  steamship  lines 
built  and  acquired  for  the  purpose  of  facilitating  the  transpor- 
tation of  the  crude  ore  to  the  market;  (5)  the  Gates  group, 
controlling  the  American  Steel  and  Wire  Company  and  its 
affiliated  interests. 


No.  2] 


DISTRIBUTION  OF  SECURITIES 


283 

The  consolidation  movement  in  the  iron  and  steel  industry 
began  as  early  as  1889,  when  the  Illinois  Steel  Company,  later  * 
a constituent  part  of  the  Federal  Steel  Company,  was  formed 
by  the  union  of  two  companies,  the  North  Chicago  Rolling  Mill 
Company  and  the  Union  Steel  Company,  and  soon  after  ac- 
quired the  property  of  a third,  the  Joliet  Steel  Company.  This 
merger  was  followed  in  1891  by  the  consolidation  of  the  Lack- 
awanna Iron  and  Coal  Company  and  the  Scranton  Steel  Com- 
pany into  the  Lackawanna  Iron  and  Steel  Company.  At  about 
the  same  time  Laughlin  and  Company,  Ltd.,  and  Jones  and 
Laughlin,  Ltd.,  united  to  form  the  well-known  Jones  and  Laughlin 
Company.  In  1892,  two  important  steps  in  the  consolidation 
movement  were  effected : first,  the  organization  of  the  Carnegie 
Steel  Company,  Ltd.,  a partnership  bringing  into  closer  and 
more  efficient  union  the  Carnegie  and  Frick  properties  and  the 
various  affiliated  companies  which  they  had  been  acquiring 
during  the  previous  decade ; second,  the  formation  of  the  Con- 
solidated Steel  and  Wire  Company,  a union  of  three  competing 
companies,  which  later  formed  the  center  of  the  American 
Steel  and  Wire  Company  when  the  latter  company  was  pro- 
moted in  1899. 

During  the  period  from  1892  to  1898,  the  years  of  the  panic 
and  those  immediately  succeeding  it,  there  was  almost  no 
change  in  the  financial  organization  of  the  various  steel  and 
iron  companies.  In  the  year  1896  an  event  of  the  profoundest 
importance  occurred — the  execution  of  a contract  between  the 
Carnegie  Steel  Company  and  the  Lake  Superior  Consolidated 
Iron  Mines  Company,  by  which  the  latter  agreed  to  furnish  at 
a royalty  of  25  cents  per  ton  a considerable  portion  of  the 
former’s  requirements.  This  partial  union  of  the  Carnegie 
and  Rockefeller  interests  was  everywhere  regarded  as  a formal 
declaration  on  the  part  of  the  former  that  they  were  prepared 
for  any  competition  that  might  arise.  'The  step  just  referred 
to  was  followed  by  others  of  the  same  general  nature,  and  in 
the  course  of  the  next  two  years  the  Carnegie  Company 
secured  control  by  lease  of  a large  reserve  iron-ore  tonnage. 
The  Engineering  and  Mining  Journal^^  in  commenting  on  the 


^ January  2,  1897. 


POLITICAL  SCIENCE  QUARTERLY  [Vol.  XXX 


,284 

situation,  remarked  that  “ we  have  had  pools  and  combinations 
without  number  in  the  iron  market  in  this  country  but  never 
before  a position  like  this,  in  which  a single  company  could 
absolutely  dominate  the  trade  and  make  any  combination  which 
can  be  formed  simply  the  register  of  its  own  wishes.”  The 
Carnegie-Rockefeller  contract  was  followed  in  1898  by  the  for- 
mation of  the  first  of  the  great  consolidations — the  Federal 
Steel  Company — a company  uniting  the  Illinois  Steel  Company 
previously  referred  to,  the  Minnesota  Iron  Company,  with  large 
holdings  of  iron  ore  and  extensive  transportation  properties,  the 
Lorain  Steel  Company  of  Ohio,  the  Johnstown  Steel  Company 
of  Johnstown,  Pa.,  and  the  Elgin,  Joliet  and  Eastern  Railway. 
During  the  years  1899  and  1900,  the  Moore  brothers,  W.  H. 
. and  J.  H.,  formerly  connected  with  the  Diamond  Match  Com- 
pany, entered  the  field  as  the  promoters  of  four  companies 
known  as  the  Moore  group,  which  comprised  the  National  Steel 
Company,  the  American  Tin  Plate  Company,  the  American 
Steel  Hoop  Company,  and  the  American  Sheet  Steel  Company. 
The  first  company  manufactured  crude  steel  and  heavy  steel 
products;  the  other  three  were  important  consum.ers  of  the 
above  products.  During  the  same  period  the  remaining  Mor- 
gan companies  were  organized — the  first,  the  National  Tube 
Company  in  June,  1899,  the  second,  the  American  Bridge 
Company  in  1900,  each  being  made  up  of  a considerable  num- 
ber of  formerly  competing  companies.  As  .to  the  two  other 
companies  which  entered  the  steel  corporation,  the  Carnegie 
Company,  while  not  a consolidation  in  the  ordinary  sense,  had 
for  many  years  been  buying  up  competitors  and  integrating 
many  of  the  companies  which  it  found  convenient  as  furnishers 
of  raw  materials,  while  the  Shelby  Tube  Company  was  a fairly 
complete  consolidation  of  the  leading  manufacturers  of  seam- 
less tubing.  It  was,  however,  dependent  upon  the  manufac- 
turers of  crude  steel  for  the  material  which  formed  the  basis  of 
the  drawn  tubing. 

The  formation  of  the  several  steel  companies  above  described 
was,  however,  but  a first  step  in  the  consolidation  of  the  steel 
industry.  Almost  immediately  after  the  fundamental  consoli- 
, dations  were  effected,  the  natural  effects  of  such  a movement 


No.  2] 


DISTRIBUTION  OF  SECURITIES 


285 

began  to  be  felt.  First,  the  National  Tube  Company  began  the 
erection  of  blast  furnaces,  thus  depriving  the  Carnegie  Com- 
pany of  one  important  consumer  of  billets  and  other  heavy  raw 
materials  used  in  the  manufacture  of  tubing.  The  Carnegie 
Company  had  for  some  time  been  planning  extensions,  and  as 
a direct  result  of  the  action  of  the  National  Tube  Company  it 
was  decided  to  erect  a modern  plant  at  Conneaut  Harbor,  where 
it  was  thought  the  cost  of  manufacturing  would  be  reduced  to  a 
minimum.^  Second,  as  a result  of  a long-standing  controversy 
between  the  Pennsylvania  Railroad  and  the  Carnegie  Company 
over  rates,  the  latter  had  determined  to  build  a new,  low-grade, 
short-line  railroad  from  Pittsburgh  to  tidewater  via  the  Western 
Maryland  Railroad.  The  plans  as  proposed  called  for  the 
construction  of  156  miles  of  railroad  connecting  the  Union 
Railroad  with  the  Western  Maryland  at  Cumberland,  thus  free- 
ing Pittsburgh  from  the  monopoly  of  the  Pennsylvania,  and  giv- 
ing the  district,  as  Mr.  Carnegie  said,  “ competition  of  rail- 
roads.” ^ Third,  early  in  the  fall  of  1899,  Mr.  Charles  M. 
Schwab  of  the  Carnegie  Company  spoke  before  a company  of 
distinguished  business  men  in  New  York  city  on  the  advantages 
of  consolidation  in  the  manufacture  and  marketing  of  steel.3 
Morgan  sat  at  his  right  and  among  the  men  present  were 
Harriman,  Carnegie,  Phipps  and  seventy  or  eighty  others.^ 
Fourth,  Mr.  Morgan,  whose  tube  plant  was  threatened  by  the 
plans  of  the  Carnegie  Company  and  whose  interest  in  rail- 
roads was  a dominant  factor  in  all  his  plans,  began  to  give 
the  situation  more  serious  attention.  According  to  both  Mr. 
Gates  and  Mr.  Schwab,  Mr.  Morgan  discussed  the  situation 
with  the  former  and  then,  through  the  instrumentality  of  Mr. 
Gates,  sent  for  Mr.  Schwab  for  the  purpose  of  going  over  the 
project  in  detail.  A meeting  was  arranged  and  the  matter  was 
discussed  at  considerable  length  and  after  a day  or  two  Mr. 

* Testiniony  of  Mr.  Carnegie,  Hearings  before  the  House  Committee  on  the  in- 
vestigation of  the  U.  S.  Steel  Corporation,  page  2445  ff.  Hereafter  referred  to  as 
the  Stanley  Report;  ibid,  pp.  40,  1311  ff. 

2 Gates,  Stanley  Report,  p.  40.  Carnegie,  ibid,  2445  ff . Century  Magazine,  August, 
1908. 

® Testimony  of  C.  M.  Schwab,  Stanley  Report,  p.  1278.  Ibid.,  p.  1278. 


286 


POLITICAL  SCIENCE  QUARTERLY  [Vol.  XXX 


Morgan,  having  been  convinced  of  the  desirability  of  the  pro- 
ject, requested  Mr.  Schwab  to  see  Mr.  Carnegie  and  to  obtain 
a price  on  the  Carnegie  properties.  This  was  done  within  a 
few  weeks,  the  price  set  being  $420,000,000,  payment  to  be 
made  in  cash  or  five  per  cent  bonds. ^ Mr.  Morgan  then  con- 
sulted Mr.  Gary."*  After  a full  discussion  of  the  plan,  a confer- 
ence was  arranged  with  the  principal  directors  in  the  Federal 
Steel  Company,  including  Ream,  Rogers,  Mills,  Porter  and 
Field.  Here  again  the  desirability  and  practicability  of  the 
proposed  consolidation  was  carefully  considered  and  after  such 
consideration,  despite  the  opposition  of  Mr.  Porter  and  others, 
the  project  was  affirmed  and  Mr.  Morgan  consented  to  act  as 
the  manager  of  an  underwriting  syndicate  to  furnish  the  finan- 
cial backing  that  was  required.^  As  a result  the  United  States 
Steel  Corporation  was  formed  under  the  New  Jersey  law  on  the 
25th  of  February,  1901,^  and  on  the  26th  ^ of  the  same  month 
the  Morgan  Syndicate  was  formally  organized  by  a group  of 
financiers,  including  Mr.  Morgan,  the  leading  men  connected 
with  the  several  steel  companies  which  it  was  planned  to  unite, 
and  several  others.  The  plan  under  which  the  steel  industry 
was  consolidated  was  prepared  within  a comparatively  few  days 
and  on  March  i,  1901,^  was  submitted  to  the  directors  of  the 
United  States  Steel  Corporation  at  their  second  meeting  and 
duly  approved. 7 

The  plan  provided  for  the  increase  of  the  capital  stock 
of  the  steel  corporation  from  $3000,  the  amount  originally 
authorized,  to  an  aggregate  issue  of  $424,998,500  of  preferred 
stock,  the  same  amount  of  common  stock,  and  $304,000,000  of 
five  per  cent  bonds  of  such  form,  tenor  and  security  as  J.  P. 
Morgan  and  Company  should  determine.  The  entire  amount 
of  capitalization  provided,  including  the  bonds,  was  to  be  trans- 

* Testimony  of  Mr.  Carnegie,  Ibid.,  pp.  2377  ff. , 2438  ff. 

* Testimony  of  Mr.  Gary.  Ibid , p.  205  ff. 

® Testimony  of  E.  H.  Gary.  Ibid.,  pp.  205-6. 

^ Ibid.,  p.  3749. 

^ Report  of  Bureau  of  Corporations  on  the  Steel  Industry,  part  i,  p.  390. 

^ Ibid.,  p.  383.  7 Stanley  Report,  p.  3750. 


No.  2]  DISTRIBUTION  OF  SECURITIES  287 

ferred  to  the  syndicate  in  exchange  for  the  entire  bond  issue  of 
the  Carnegie  Company,  all  the  shares  of  the  capital  stock  of  the 
eight  companies  included  in  the  consolidation,  the  statutory 
fees  and  taxes  connected  with  the  issuance  of  the  new  securities, 
and  $25,000,000  in  cash.  The  syndicate  was  allowed  until 
May  30,  1901,  to  complete  the  exchange  and  the  entire  agree- 
ment was  contingent  upon  the  ability  of  the  syndicate  to  deliver 
at  least  fifty-one  per  cent  of  the  common  and  preferred  stock 
of  each  of  the  companies.  If  the  syndicate  should  fail  to  de- 
liver all  of  the  capital  stock  of  each  of  the  companies  and  all  of 
the  bonds  of  the  Carnegie  Company,  the  following  allowances 
were  to  be  made : 


NAME  OF  COMPANY  AND  CLASS  OF  STOCK 


AMOUNT  OF  STOCK  TO  BE  DEDUCTED 
IN  PAR  VALUE 


PREFERRED  STOCK 

COMMON  STOCK 

Carnegie  Company,^  common  stock 

$150.00 

i 

1 $150.00 

Federal  Steel  Company: 

1 

Preferred  stock  

1 10.00 

i 

Common  stock  . . ... 

4.00 

1 10750 

1 

American  Steel  and  Wire  Company  of  New  Jersey: 

Preferred  slock  

117.50 

Common  stock  

102.50 

National  Tube  Company: 

Preferred  stock  

125.00 

Common  stock  ...  

8.80 

125.00 

National  Steel  Company: 

Preferred  stock 

125.00 

Common  stock 

125.00 

American  Tin  Plate  Company: 

Preferred  stock 

125.00 

Common  stock 

20.00 

125.00 

American  Steel  Hoop  Company : 

Preferred  stock 

100.00 

Common  stock  ...  

100.00 

American  Sheet  Steel  Company: 

Preferred  stock  

Common  stock 

100.00 

1 

100.00 

In  accordance  with  the  terms  of  the  underwriting  agreement, 

^ For  each  $1000  par  value  of  the  bonds  of  the  Carnegie  Company  as  should  not 
be  acquired  the  agreement  provided  that  $1000  par  value  of  the  bonds  of  the  Steel 
Corporation  should  be  abated  and  deducted.  Report  of  the  Commissioner  of  Cor- 
porations on  the  Steel  Industry,  part  i,  p.  385. 


288 


POLITICAL  SCIENCE  QUARTERLY  [Vol.  XXX 


J.  P.  Morgan  and  Company,  as  syndicate  managers,  issued  on 
March  2,  1901,  a circular  letter^  addressed  to  the  stockholders 
of  the  eight  companies,  stating  the  conditions  under  which  the 
underwriting  was  to  be  carried  out,  calling  attention  to  the  ex- 
pected advantages  of  the  consolidation  and  offering  to  exchange 
stock  in  the  United  States  Steel  Corporation  for  stock  in  the 
several  companies  at  the  rate  of  exchange  named  in  the  under- 
writing agreement.  The  circular  letter  appeared  as  an  ad- 
vertisement in  the  daily  press  as  well  as  in  the  financial  journals 
and  on  March  21,  1901,  public  announcement  was  made  by  the 
syndicate  managers  that  a very  large  proportion  of  all  the  stocks 
had  been  exchanged  and  that  the  projected  consolidation  was 
consummated.^ 

Even  while  the  exchange  of  stock  between  the  United  States 
Steel  Corporation  and  the  eight  companies  was  being  effected, 
it  was  proposed  by  those  connected  with  the  active  manage- 
ment to  extend  the  scope  of  the  consolidation  by  acquiring  con- 
trol of  six  other  companies.  This  proposition  was  presented 
to  the  board  of  directors  on  March  30,  1901,  duly  approved, 
and  their  action  was  confirmed  by  the  stockholders  of  the 
original  $3000  United  States  Steel  Corporation  on  April  1.3 
Immediately  thereafter  a second  underwriting  agreement  was 
entered  into  between  Morgan  and  Company  and  the  United 
States  Steel  Corporation  by  which  it  was  agreed  to  increase  the 
capital  stock  of  the  corporation  and  to  exchange  the  new  shares 
for  the  capital  stock  of  the  following  companies  on  the  terms 
named  in  the  table  at  the  top  of  page  290. 

The  second  part  of  the  consolidation  in  accordance  with  the 
above  plan,  with  the  exception  of  the  Colorado  Fuel  and  Iron 
Company,  was  effected  without  apparent  difficulty  during  the 
month  of  April,  1901,  the  capital  stock  having  been  further  in- 
creased to  $1,100,000,000,  one-half  preferred  and  one-half 

* Report  of  the  Commissioner  of  Corporations  on  the  Steel  Industry,  part  i,  pp. 
396-400. 

^Circular  Letter,  72  Commercial  and  Financial  Chronicle^  March  23,  1901. 

^ Stanley  Report,  p.  3750. 

^Underwriting  agreement  of  April  i,  1901.  Appendix  to  Report  of  Commissioner 
of  Corporations  on  the  Steel  Industry,  part  i,  p.  386. 


No.  2] 


DISTRIBUTION  OF  SECURITIES 


289 


Comparison  of  Securities  Issued  by  United  States  Steel  Corporation  in  1901  with 

AMOUNTS  OF  SECURITIES  OF  CONSTITUENT  CONCERNS  AND  CASH  ACQUIRED  THEREFOR  ^ 


COMPANY 

SECURITIES 
AND  CASH 

UNITED  STATES 
STEEL  STOCK  IS- 
SUED FOR  EACH 
$100  OLD  STOCK 

AMOUNT  UNITED  STATES  STEEL  SECURITIES  ISSUED 
IN  EXCHANGE 

ACQUIRED 

PRE- 

FERRED 

COM- 

MON 

BONDS 

PREFERRED 

STOCK 

COMMON 

STOCK 

TOTAL 

Carnegie  Company : 

$159,450,000 

160,000,000 

53,260,200 

46,483,700 

39.997»4oo 

$159,450,000 

144,000,000 

$98,277,120 

58,586,220 

1,859,348 

49,996,750 

7.  CIA  /tOT 

$90,279,040 

$492,006,160 

Federal  Steel  Company: 

$110.00 

$107.50 

49,969,978 

T 10,415,546 

National  Tube  Company: 

8,' 80 

AQ  021  7CO 

107  A72  OAT 

Am.  Steel  and  Wire  Co. : 

39.998.500 
49,901,900 

26,992,200 

31.969.800 

18.325.000 

27.995.000 

13.997.500 

18.995.000 

24,497,700 

24.498.800 

31.348.000 
30,946,400 

on  T 0 AAC 

125  00 

46,998,237 

51,149,448 

98,147,685 

National  Steel  Company: 

ID2  50 

77  7 AO  2 CO 

39,962,250 

77. 702. COO 

American  Tin  Plate  Co. : 



T75  ^0 

22,906,250 

C CAO  000 

^^ommon  st^rV  - - - ----- 

^20  00 

7A  AA7  7CO 

63,499,000 

American  Steel  Hoop  Co.: 



125  00 

T7  AA^  CAA 

r^nmmAn  ctnrlr 

100.00 

100  00 

18,995,000 

72  002  COO 

American  Sheet  Steel  Co. : 



2A  AOrr  TOO 

C* AinmAn  ctAr*V 

100.00 

24,498,800 

48,996,500 

American  BridgeCompany : 



IIO.OO 

34,482,800 

r^niTimnn  Qtnrlr  . ^ . . - - - 

105  00 

72  AQ7«720 

66,976,520 

70  AT7  CA2 

Lake  Superior  Consolidated 
Iron  Mines  Company: 

Common  stock 

Oliver  Iron  Mining  and 
Pittsburg  S.  S.  Co.,  one- 

civth  intprPQt  * 

T Q C OA 

i^c  00 

39,708,771 

39,708,771 

/yy^^  / yj^^ 

18,500,000 

Shelby  Steel  Tube  Co.: 
Preferred  stock.  . 



4,776,100 

8,018,200 

‘I'T  CO 

9,250,000 

1,791,038 

9,250,000 

1 

2 AAA  CCA 

3,795,588 

1 

25,00 

Total  securities  by  direct 

881,224,405 
174,000  ) 

707  .ACO  000 

AAC  20c  A'TC 

AA7.227  OC7 

1,191,882,532 

129,997,605 

To  syndicate  for  ^174,000 
par  value  stocks,  $25,000,- 
000  in  cash  and  services. 
To  incorporators  for  cash. . 

64,998,837 

64,998,837 

T CAA 

25,000,000  i 

3,000 

1,500 

3,000 

Total,  securities  and  cash 
Underlying  bonds  of  con- 
stituent companies...... 

906,401,405 

CTO  20c  '7A7 

508,227,394 

1,321,883,137 

59,091,657 

21,872,023 

! 

303,450,000 

Mortgages  and  purchase 
money  obligations  of  con- 
stitU6nt  companies*  • • • • • 

i 

1 

Grand  total  securities  is- 
sued and  assumed  .... 

906,401,405  1 

303,450,000 

510,205,743 

508,227,394 

1,402,846,817 

no 

t 0 ^ 

[o'd 

*0-0 

}o9 

^70 

^<foo 


1 For  details  concerning  securities  outstanding,  Carnegie  bonds,  purchase-money  obligations,  and  securities 
secured  by  other  than  direct  exchange,  see  pp.  114  and  174  of  the  Report  of  the  Bureau  of  Corporations.  The 
Steel  Industry  I,  pp.  114  and  174. 


290 


POLITICAL  SCIENCE  QUARTERLY  [Vol.  XXX 


COMPANIES 

FOR  EACH  SHARE  PAR  VALUE  $IOO  IN  U.  S. 
STEEL  SECURITIES 

PREFERRED 

COMMON  STOCK 

American  Bridge  Company : 

Preferred 

Common.  

Shelby  Steel  Tube  Company : 

no 

105 

Preferred 

Lake  Superior  Consolidated  Iron  Mines 
Company: 

37.5 

25 

Common 

One-sixth  interest  in  Oliver  Iron  Mining 
Company  and  the  Pittsburgh  Steel  Com- 

135 

135 

pany  

Bessemer  Steamship  Company 

92,500  shares 
$8,500,000  in  cash  ^ 

92,500  shares 

common,  for  the  purpose  of  making  the  exchange  of  stock  on 
the  terms  proposed  in  the  agreement.  The  results  of  the  plan, 
after  all  of  the  exchanges  had  been  made,  are  shown  in  table 
on  page  289  : ^ 

III 

Neither  at  the  time  that  the  United  States  Steel  Consolidation 
was  formed  nor  at  any  time  since  then,  so  far  as  the  writer  has 
been  able  to  discover,  has  an  explanation  been  made  of  the 
principle  or  principles  upon  which  the  exchange  of  securities 
was  based.  In  the  case  of  the  four  Moore  companies  an  ex- 
ception to  the  above  statement  ought  to  be  made,  for  while  no 
clue  is  given  to  the  distribution  of  securities  as  between  the 
Moore  Companies  and  all  the  others,  it  is  stated  in  the  official  ' 
announcement  that  the  aggregate  amount  of  stock  to  be  offered 
to  the  four  companies  was  distributed  among  them  in  the  per- 
centages given  in  the  public  circular,  in  accordance  with  ar- 
rangements made  with  the  principal  stockholders. 3 

It  is  evident,  however,  even  without  a careful  analysis,  that 
neither  the  Moore  method  nor  the  scientific  plan  described  in 

^ Minutes  of  the  Board  of  Directors,  meetings  held  March  30  and  April  i,  1901. 
Stanley  Report,  pp.  3750-1. 

^Bureau  of  Corporations;  Report  on  the  Steel  Industry,  part  i.,  p.  113. 

^Circular  of  announcement,  March  2,  1901. 


No.  2] 


DISTRIBUTION  OF  SECURITIES 


291 


the  preceding  sections  was  followed.  If  the  latter  plan  had 
been  adopted,  not  only  would  the  various  interests  which  were 
combined  into  one  single  administrative  business  unit  have  been 
placed  upon  a parity  in  the  new  company,  but  in  addition  the 
capitalization  of  the  United  States  Steel  Corporation  would  have 
been  much  less  watered  than  was  the  case. 

It  will  be  remembered  that  the  scientific  plan  is  based  upon  two 
principles  : first,  preferred  stock  to  be  issued  equal  to  the  value  of 
the  tangible  assets ; and  second,  common  stock  of  an  equal  or 
larger  amount  but  distributed  among  the  several  parties  to  the  con- 
solidation in  proportion  to  the  surplus  earnings  after  the  preferred 
dividends  have  been  provided  for.  Consequently  in  the  formula- 
tion of  a scientific  plan,  two  series  of  facts  are  necessary,  (i) 
the  net  tangible  assets  of  the  several  companies,  properly  valued, 
and  (2)  the  net  profits  of  each  for  a period  of  time  sufficiently 
long  to  be  fairly  representative  of  actual  earning  power.  It  is 
evident  that  the  promoters,  at  the  time  the  steel  consolidation 
was  in  process  of  formation,  were  in  possession  of  the  requisite 
data,  although  the  records  do  not  show  to  what  extent  the 
printed  reports  of  the  several  companies  ^ were  subjected  to  ex- 
amination by  the  expert  staff  of  appraisers  and  accountants 
connected  with  the  Morgan  office.  In  presenting  the  plan  of 
consolidation  to  the  directors  of  the  United  States  Steel  Cor- 
poration, Mr.  Steele  stated  in  behalf  of  the  Morgan  Syndicate 
that  “ the  principal  officers  of  the  Carnegie  Company  have  sat- 
isfied us  that  the  net  earnings  of  the  properties  which  are  now 
included  in  the  Carnegie  Company  for  the  year  1900  are  up- 
wards of  $40,000,000,”  and  that  the  earnings  of  the  American 
Sheet  Steel  Company  for  ten  months  ending  January  31,  1901, 
were  “ $850,000  after  making  a substantial  allowance  for  de- 
preciation and  investments  in  improvements.”  In  addition  he 
submitted  for  the  information  of  the  directors  the  printed  re- 
ports of  all  the  companies  except  the  Carnegie  Company."* 
As  a result  of  the  investigations  of  the  Bureau  of  Corporations 
there  is,  however,  fairly  reliable  information  as  to  the  respective 

^ Except  the  Carnegie  Company.  Stanley  Report,  p.  374. 

Ibid.,  p.  3749. 


292 


POLITICAL  SCIENCE  QUARTERLY  [Vol.  XXX 


assets  of  the  several  companies  at  the  time  of  the  consolidation 
and  some  data,  though  far  from  satisfactory,  as  to  their  respec- 
tive earnings.  The  available  information  as  to  the  assets  at  the 
date  of  consolidation  and  the  earnings  of  the  several  companies 
for  periods  specified  in  the  footnotes  is  given  in  the  following 
table : 


Assets  and  Earnings  of  the  Consolidated  Companies 


COMPANY 

1 

ESTIMATED 

VALUE  OF 
TANGIBLE 
ASSETS  ^ 

MARKET 
VALUE  OF 

ASSETS 

STATED  OR 

ESTIMATED 

NET  EARNINGS 

Carnegie  Company 

^197,563 

$327,422 

$40,000  ^ 

P'ederal  Steel  Company 

81,147 

63,940 

11,722  * 

National  Tube  Company 

67,485 

57,168 

13,878^1 

National  Steel  Company 

33>909 

37,931 

8,750® 

American  Tin  Plate  Company 

24,503 

25,370 

5,850^ 

American  Sheet  Steel  Company 

17,706 

20,895 

1,6808 

American  Steel  Hoop  Company 

15,661 

16,928 

4,026  8 

American  Steel  and  Wire  Company  .... 

53,162 

59,884 

12,362 

American  Bridge  Company  ...... 

Lake  Superior  Consolidated  Iron  Mines 

35,404 

42,773 

6,201 

Company  

3L495 

22,060 

6,668 

Shelby  Steel  Tube  Company  . . ... 

Oliver  Iron  Mining  Company  and  Pittsburgh 

2,791 

3.571 

222 

Steel  Company,  one-sixth 

Bankers’  Investment . 

9,250 

9,250 

264 

25.003 

25,003 

4,986 

$595,079 

$712,193 

$116,578 

6.7-  - 


Three  ciphers  (000)  omitted. 

^ Report  on  the  Steel  Industry,  I,  p.  167. 

Ibid. ^ I,  p.  170. 

^Stanley  Report,  p.  3749;  Bridge,  History  of  the  Carnegie  Steel  Company,  p. 
363  ff. 

^ Report  on  the  Steel  Industry,  I,  p.  127. 

^ Ibid.,  I,  p.  161.  ^Ibid.,  I,  p.  138. 

■^Annual  Report — Chronicle,  vol.  72,  p.  134. 

® Report  on  the  Steel  Industry,  I,  p.  141,  See  also  Mr.  Steele’s  statement, 
Stanley  Report,  p.  3750. 

® Annual  Report — Chronicle,  vol.  70,  p.  1093. 

Ibid.,  Dec.  31,  1900,  Report  on  the  Steel  Industry,  I.  p.  161. 

Stephen  Little’s  report  to  Promoter.  Stanley  Report,  p.  4170. 

'^Average  of  earnings  for  1901-1910. 

Based  upon  the  assumption  that  the  cash  contributed  would  earn  the  average 
rate,  that  is,  .1958  per  cent  upon  tangible  assets. 


No.  2] 


DISTRIBUTION  OF  SECURITIES 


293 


The  method  of  obtaining  the  estimated  value  of  the  tangible 
assets  of  the  several  companies  is  explained  at  length  in  the  re- 
port of  the  Commissioner  of  Corporations  on  the  Steel  Industry." 
As  a rule,  the  valuation  placed  upon  the  tangible  assets  appears 
to  be  fairly  liberal.  In  most  cases,  much  dependence  was 
placed  upon  the  valuations  determined  upon  in  connection  with 
the  primary  consolidations  which  occurred  during  the  years  im- 
mediately preceding  1901.  Additions  were  made  for  cash  con- 
tributions to  the  working  capital  and  deductions  were  allowed 
wherever  it  appeared  from  an  examination  of  the  accounts  or 
tangible  assets  that  there  had  been  an  over-valuation.  The 
market  valuation  was  computed  by  taking  the  average  market 
price  of  the  several  securities  as  found  by  the  commissioner  of 
corporations  ^ and  multiplying  by  the  total  amount  of  outstand- 
ing securities,  of  each  class  separately,  and  combining  the  re- 
sults for  each  company  as  a unit.  Some  of  the  securities  were 
distinctly  of  the  stock-exchange  variety  and  these  were  un- 
doubtedly given  a somewhat  artificial  valuation.  The  securities 
of  others,  as  for  example  the  Carnegie  Company  and  the  Lake 
Superior  Consolidated  Iron  Mines  Company,  were  closely  held 
and  the  market  quotations  were  probably  more  conservative  and 
perhaps  less  representative.  As  a whole,  however,  the  market 
valuation  is  probably  more  nearly  representative  than  the  esti- 
mated value  placed  upon  the  tangible  assets. 

In  obtaining  the  approximate  net  earnings  of  the  several 
companies,  various  sources  of  information  have  been  used  and 
in  general  the  source  in  each  case  is  indicated  in  the  footnotes 
to  the  table.  It  should  be  stated  at  the  outset  that  the  informa- 
tion upon  this  subject  is  extremely  meagre  and  always  unsatis- 
factory, if  not  unreliable.  In  some  cases  the  earnings  for  1899 
were  adopted,  in  others  1900,  and  in  still  others  a combination 
of  parts  of  the  two  years.  Where  no  information  was  obtain- 
able, the  companies  have  been  arbitrarily  assigned  an  earning 
power  equal  to  that  which  was  shown  in  the  ten  years  immedi- 
ately following  the  consolidation.  Since  the  earnings  as  well 

^ Part  i,  pp.  117-169. 

-Report  of  Commissioner  of  Corporations  on  Steel  Industry,  I,  p.  174. 


294 


POLITICAL  SCIENCE  QUARTERLY  .[Vol.  XXX 


as  the  value  of  the  tangible  assets  are  used  in  distributing  the 
securities  in  a consolidation  formed  upon  equitable  principles, 
it  is  evident  that  the  results  of  such  application  will  be  unsatis- 
factory in  proportion  as  the  stated  earnings  fail  to  conform  to 
actual  conditions.  The  results  obtained  by  their  use  are,  in 
other  words,  vitiated  by  the  probable  errors  in  the  hypothesis, 
and  are  therefore  submitted  as  indicative  of  certain  tendencies 
in  promotions  and  illustrative  of  a proper  plan  of  consolidation, 
rather  than  as  statements  of  facts. 

With  the  above  explanations  in  mind  and  subject  to  the  lim- 
itations imposed  by  the  unsatisfactory  data,  it  may  prove  illum- 
inating to  apply  first  the  plan  proposed  in  the  preceding  pages, 
second,  that  adopted  by  the  Moore  Brothers  in  their  several 
promotions  and  known  generally  as  the  Moore  method,  to  the 
facts  in  hand. 

Under  the  conditions  as  above  stated,  had  the  scientific 
method  been  followed,  the  stock  in  the  United  States  Steel 
Corporation  would  have  been  issued  in  the  quantities  and  to 
the  several  parties  in  interest  as  in  the  table  immediately  fol- 
lowing : 


Scientific  Method  ^ 


COMPANY 

PREFERRED 

STOCK 

EARN- 

INGS 

DIVIDENDS 
ijii)  ON 
PREFERRED 

SURPLUS 

FOR 

COMMON 

COMMON 

STOCK 

Carnegie  Company 

$197,563 

$40,000 

$14,829 

$25,171 

$176,425,900 

Federal  Steel  Company.  . . . 

81,147 

11,722 

5,680 

6,042 

42,348,950 

National  Tube  Company  . . 

67,4^5 

13,878 

4,724 

9,I'4 

64,161,250 

National  Steel 

33,909 

8,750 

2,374 

6,376 

44,689,980 

Tin  Plate  

24,503 

5,850 

1,715 

4,135 

28,982,600 

Sheet  Steel  .... 

17,706 

1,680 

1,239 

441 

3,091,010 

Steel  Hoop 

15,661 

4,026 

1,096 

2,930 

20,536,650 

Steel  and  Wire 

53,162 

12,362 

3,721 

8,641 

60,565,580 

American  Bridge  Company,  . 

35,404 

6,201 

2,478 

3,723 

26,094,850 

Lake  Superior  

31,495 

6,668 

2,205 

4,463 

31,281,580 

Shelby  Steel  Tube 

2,791 

222 

195 

27 

189,250 

Oliver  and  Pittsburgh,  one-sixth. 

9,250 

264 

647 

deficit 

Bankers 

28,003 

4,896 

1,750 

3,146 

22,050,610 

Promoters  ( 12.54636  per  cent). 

0 

0 

0 

0 

74,660,790 

$595,079 

116,518 

$42,653 

$74,249 

^595,079,000 

^ Three  ciphers  (ooo)  omitted  except  in  last  column. 


No.  2] 


DISTRIBUTION  OF  SECURITIES 


295 


It  is  of  course  questionable  whether  the  promoter,  either 
from  the  economic  or  equitable  point  of  view,  is  entitled  to  so 
large  a share  of  the  common  stock  as  here  awarded,  namely, 
twelve  per  cent,  more  exactly  12.54636  per  cent.  That  ques- 
tion, however,  is  one  between  the  promoter  and  the  promoted 
interests  and  does  not  necessarily  affect  the  relative  shares 
allotted  to  the  several  companies  involved.  In  this  case  the 
twelve  per  cent  rule  was  followed  because  the  promoters  thus 
receive  approximately  the  same  proportion  as  they  were 
awarded  in  the  Morgan  plan.  If  thirty  per  cent  had  been 
allotted  to  the  promoter,  as  was  the  custom  at  that  time,  he 
would  have  received  $178,524,000  of  the  common  stock  in- 
stead of  the  amount  assigned,  and  the  difference,  somewhat 
over  $100,000,000,  would  have  been  subtracted  from  the  other 
interests  in  the  same  proportions  as  that  already  allotted.  It 
should  further  be  noted  that  five  per  cent  first  collateral  trust 
gold  bonds  may  be  substituted  for  seven  per  cent  preferred 
stock  either  partially  or  as  a general  plan  without  disturbing 
the  established  scheme  or  the  method  of  distributing  the  com- 
mon stock. 

The  Moore  plan  of  distributing  securities  in  forming  a 
consolidation  was  used  in  the  promotion  of  the  American  Tin 
Plate  Company.  Since  for  its  application  in  the  present  case 
the  market  value  only  of  the  assets  of  the  several  companies  is 
required,  the  results  may  claim  to  be  fairly  accurate.  Here  the 
promoter  is  allotted  35.71  per  cent  of  the  common  stock,  that 
being  the  relative  amount  that  he  received  in  the  case  of  the 
promotion  of  the  American  Tin  Plate  Company.  This  would 
amount  to  $395,663,000  par  value  in  common  stock  out  of  a total 
of  $1,107,858,000.  This  amount  at  $32.17  per  share  would 
have  yielded  the  sum  of  $127,291,950  in  cash  provided  the 
promoter  had  sold  out  at  the  time,  on  prevailing  market  condi- 
tions. The  plan  worked  out  in  detail  is  given  in  the  table  at 
the  top  of  page  296. 

It  is  evident  that  the  adoption  of  a particular  plan  determines 
the  relative  share  that  each  of  the  several  companies  is  allotted 
in  the  new  consolidation.  Before  an  accurate  comparison  can 
be  made,  however,  it  is  necessary  to  find  a common  unit  of 


296 


POLITICAL  SCIENCE  QUARTERLY  [Vol.  XXX 


The  Moore  Method  ^ 


NAME 

j 

PREFERRED  ! 

PER 

CENT  1 

i 

COMMON 

PER 

CENT 

Carnegie  Company 

$327,422 

46. 

1 

$327,422 

j 

29-55 

Federal  Steel 

63,940  1 

9. 

63,940 

7-77 

National  Tube 

57,168 

8. 

57,168 

5.16 

National  Steel 

37,931  i 

5-3 

37,931 

3-42 

Tin  Plate  

25,370 

3-6 

25,370 

2.28 

Sheet  Steel 

20,895 

2.9 

20,895 

1.88 

Steel  Hoop 

16,928 

2.4 

i6,q28 

1.52 

Steel  and  Wire 

59,884 

8.4 

59,884 

5-40 

American  Bridge 

42,773 

6. 

42,773 

3.86 

Lake  Superior 

22,060 

3-1 

22,060 

1.99 

Shelby  Steel  Tube 

3>57i 

•5 

3,571 

•32 

Oliver  and  Pittsburgh,  one -sixth  . . 

9,250 

1 ’^•3 

9,250 

.83 

Bankers  

25,003 

! 

25,003 

2.25 

Promoter 

’ 

395,663 

35  71 

j 

$712,195 

100. 

$1,107,858 

1 

i 100. 

value  for  the  several  companies  and  by  means  of  this  unit  re- 
duce the  securities  to  a common  denominator  and  then  com- 
pare the  results.  It  is  of  course  quite  impossible  to  do  this 
with  scientific  precision,  but  by  the  use  of  certain  information 
that  is  available  it  is  practicable  to  reach  an  approximation  of 
some  value  for  our  purposes.  It  was  the  evident  intention  of 
those  responsible  for  preparing  the  plan  actually  adopted  to 
make  the  conditions  of  issue  and  the  relative  quantities  of 
securities  provided  for  of  such  an  amount  that  the  bonds  and 
preferred  stocks  would  each  be  worth  par  while  the  common 
stocks  were  to  be  worth  one-half  of  par.^ 

As  a matter  of  fact  this  assumption  has  been  fairly  well  sus- 
tained by  the  market,  although  at  times  both  the  preferred  and 
common  have  been  far  below  the  value  set  upon  them  by  the 
promoters.  Applying  this  principle  to  the  securities  as  dis- 
tributed by  the  Morgan  plan,  that  is,  rating  the  bonds  and  pre- 
ferred stock  at  par  and  the  common  at  one-half  of  par,  the  re- 
sults are  as  indicated  in  the  first  table  on  page  297. 

^ Three  ciphers  (000)  omitted. 

2 Circular  of  March  9,  1901,  issued  to  the  stockholders  and  bondholders  of  the 
Carnegie  Company,  stating  the  terms  of  exchange  of  securities  and  the  disposition  of 
fractional  shares.  Bridge’s  History  of  the  Carnegie  Steel  Company,  p.  363. 


No.  2] 


DISTRIBUTION  OF  SECURITIES 


297 


Adjusted  Distribution — Morgan  Method  ^ 


NAME 

FACE  VALUE 

PREFERRED 
AND  BONDS 

ONE-HALF 

PAR  VALUE 

OF  COMMON 

TOTAL  VALUE 

AWARDED 

PER 

CENT 

Carnegie  Company 

$402,277 

$45,140 

$447,416 

41.87 

Federal  Steel 

60,446 

24,985 

85,432 

7-99 

National  Tube 

53>52o 

25,000 

78,520 

7.35 

National  Steel 

33»75o 

20,000 

53,750 

5-03 

Tin  Plate 

28,506 

17,500 

46,006 

4.30 

Sheet  Steel 

24,500 

12,250 

36,750 

3-44 

Steel  Hoop 

14,000 

9,500 

23,500 

2.20 

Steel  and  Wire 

47,000 

25,625 

72,625 

6.80 

American  Bridge 

34,511 

16,249 

50,760 

4.75 

Lake  Superior . . . 

39,723 

19,862 

59,585 

5.58 

Shelby  Steel  Tube 

1,875 

1,019 

2,894 

.27 

Oliver  and  Pittsburgh,  one-sixth.  . 

9,250 

4,625 

13,875 

1.29 

Bankers  and  promoters 

65,000 

32,500 

97,500 

9.12 

Total 

$814,358 

$252,255 

$1,068,613 

100. 

Adjusted  Distribution — Moore  Method  ^ 


NAME 

1 

j FACE  OF 
PREFERRED 

32.17181  PER 
CENT  COMMON 

TOTAL  VALUE 

AWARDED 

PER 

CENT 

Carnegie  Company 

$327,422 

$105,337-58 

$432,759-58 

1 

40.49 

Federal  Steel 

63,940 

20,570.66 

84,510.66 

7.81 

National  Tube 

57,168 

18,391.98 

75,559-98 

7-07 

National  Steel 

37,931 

11,203.09 

50,134.09 

4-69 

Tin  Plate 

25*370 

8,161.99 

33,531  99 

3-15 

Sheet  Steel 

20,895 

6,722.31 

27,617.31 

2.58 

Steel  Hoop 

16,928 

5,446.04 

22,374.04 

2.09 

Steel  and  Wire 

59,884 

19,265.77 

79,149  77 

7.41 

American  Bridge 

42,773 

13,760  85 

56,53385 

5-29 

Lake  Superior 

22,060 

7,097.11 

29,157.11 

2-74 

Shelby  Steel  Tube 

3,571 

1,148.86 

4,719.86 

-44 

Oliver  and  Pittsburgh,  one-sixth  . . 

9,250 

2,975.89 

12,225.89 

1. 14 

Bankers 

25,003 

8,043.92 

33,046.92 

3-09 

Promoter 

• • 

127,291.95 

127,291.95 

11.91 

Total 

$712,193  j 

$356,418. 

1,068,613.  ! 

100. 

This  plan  thus  places  a total  value  of  $1,008,613,000  upon  the 
consolidated  company,  and  this  fact  must  be  borne  in  mind  in 
applying  the  general  principle  involved  to  the  other  cases.  In 
the  Moore  method,  the  total  par  value  of  the  preferred  stock 


^ Three  ciphers  (000)  omitted. 


POLITICAL  SCIENCE  QUARTERLY  [Vol.  XXX 


298 

was  fixed  at  $712,193,000.  The  common  stock  would  then 
represent  a value  of  $356,418,000  or  $32  plus,  per  share. 
The  details  of  this  plan  are  presented  in  the  second  table  on 
page  297. 

In  the  scientific  plan  proposed  in  a previous  section  of  this 
article  the  value  of  the  tangible  assets  limits  the  face  value  of 
the  preferred  stock  to  $595,079,000,  and  consequently  the 
common  stock  would  be  worth  almost  eighty  dollars  per  share, 
the  combined  value  of  the  total  issue  of  preferred  and  common 
stocks  being  the  same  in  each  case.  The  following  table  shows 
the  distribution  of  values  under  the  method  described : 


Adjusted  Distribution— Scientific  Method^ 


COMPANY 

1 FACE  OF 

1 PREFERRED 

79.57489  PER 
CENT  COMMON 

1 

1 TOTAL 

VALUE  AWARDED 

1 PER 
CENT 

1 

Carnegie  Company 

$197,563 

$140,391 

$337,954 

31-63 

Federal  Steel 

81,147 

33,699 

114,846 

10.75 

National  Tube  . 

67,485 

51,056 

118,541 

11.09 

National  Steel 

33,909 

35,562 

69,471 

6.50 

Tin  Plate 

24,503 

23,063 

47,566 

4-45 

Sheet  Steel 

1 7, 706 

2,460 

20,166 

1.89 

Steel  Hoop 

15,661 

16,342 

32,003 

2.99 

Steel  and  Wire 

53,162 

48,196 

101,358 

9.49 

American  Bridge ^ 

35,404 

20,765 

56,169 

5.26 

Lake  Superior | 

31,495 

24,892 

56,387 

5.28 

Shelby  Steel  Tube | 

2,791 

I5I 

2,942 

.28 

Oliver  and  Pittsburgh,  one-sixth.  . 

9,250 

9,250 

.87 

Bankers j 

25,003 

17,546 

^42,549 

3-97 

Promoter 

1 

59,411 

59,411 

5-55 

! 

1 

$595,079 

$473,534 

i 

$1,068,613  I 

100. 

In  the  above  tables  the  values  have  been  given  in  totals.  It 
may  now  be  worth  while  to  reduce  the  individual  assets  and 
earnings  to  percentages  of  the  total  assets  and  earnings  and 
compare  these  percentages  with  the  relative  share  of  securities 
obtained  by  each  of  the  companies  in  the  actual  allotment  of 
securities  as  well  as  in  the  hypothetical  distributions  above  pre- 
sented. The  relative  shares  in  percentages  are  as  follows : 


^ Three  ciphers  (000)  omitted. 


No.  2] 


DISTRIBUTION  OF  SECURITIES 


299 


Share  Contributed  and  Share  Allotted 


COMPANY 


Carnegie  Company 

Federal  Steel 

National  Tube 

National  Steel 

Tin  Plate 

Sheet  Steel 

Steel  Hoop 

Steel  and  Wire 

American  Bridge 

Lake  Superior 

Shelby  Steel  Tube 

Oliver  and  Pittsburgh,  one-sixth 

Bankers 

Promoter 


PERCENTAGE  CONTRIBUTED  BY 

PERCENTAGE  ALLOTTED  EACH 

TANGIBLE 

MARKET 

1 

EARN- 

SCIEN- 

ASSETS 

VALUES 

INGS 

MORGAN 

MOORE 

TIFIC 

33-20 

46.10 

34-33 

41.87 

40.49 

31.63 

13.64 

9.101 

10.05 

7.99 

7.91 

10.75 

11.34 

8.10 

II. 91 

7.35 

7.07 

11.09 

5-70 

5-4o| 

7.51 

5.03 

4.69 

6.50 

4.12 

3.70, 

5.02 

4.30 

3-iSi 

4-45 

2.97 

2.9O; 

1.44 

3.44 

2.581 

1.89 

2.63 

2.501 

3-46 

2.20 

2.09I 

2.99 

8.93 

8.50 

10.61 

6.80 

7.41! 

9.49 

5-95 

6.10 

S.32 

4.75 

5.29 

5.26 

5.29 

3-iO| 

5.72 

5.58 

2.74j 

5.28 

•47 

•50! 

.20 

1 

.27 

•44 

.28 

1.56 

1-30! 

•231 

1.29 

1. 14 

.87 

4.20 

3.60 

4.20 

\0i2l 

3.09 

3-97 

.00 

.00 

.00 

|9.I2j 

II. 91 

5.55 

100. 

lOO. 

100. 

100.  I 

100. 

100. 

It  is  thus  evident  that  under  the  Morgan  plan  the  securities 
were  distributed  to  the  various  interests,  neither  on  the  basis  of 
assets,  nor  of  earnings  nor  on  a combination  of  the  two  factors. 
There  is  indeed  a marked  similarity  between  the  market  value 
of  each  company  and  the  assumed  value  of  the  securities  as 
above  presented.  The  scientific  plan  on  the  other  hand  would 
have  distributed  the  securities  much  more  nearly  in  proportion 
to  the  respective  earning  power  of  the  twelve  companies. 

IV 

Any  investigation  of  the  methods  actually  employed  by  the 
promoters  and  bankers  in  effecting  the  consolidations  of  the 
period  beginning  in  1898  and  ending  abruptly  in  1901  ought, 
it  must  be  admitted,  to  embrace  a study  of  all  of  the  more  im- 
portant ones  and,  in  addition,  all  of  the  various  types.  Such 
an  investigation  is  at  the  present  time  obviously  impossible, 
because  of  the  fact  that  the  details  of  these  consolidations  have 
thus  far  been  kept  secret.  Indeed,  without  the  efficient  work 
of  the  Bureau  of  Corporations  in  its  study  of  the  steel  industry, 
such  a study  as  that  presented  in  this  article  could  not  have 
been  made. 


300 


POLITICAL  SCIENCE  QUARTERLY 


In  the  case  of  the  other  great  consolidations,  the  requisite 
information,  even  after  an  extensive  government  investigation, 
is  as  yet  concealed  in  the  records  of  the  corporations  involved, 
or  those  of  the  promoters  and  bankers,  or  such  information 
has  been  destroyed. 

Since  consolidation  is  likely  to  continue  as  a prominent  feat- 
ure of  our  complex  economic  organization,  it  is  of  the  utmost  , 
importance  that  the  principles  involved  as  well  as  the  methods 
employed  should  be  thoroughly  understood  by  the  owners  of 
securities  in  the  constituent  corporations.  In  this  study  atten- 
tion has  been  called  to  both  principles  and  methods,  and  it  has 
been  shown  even  with  the  meager  and  unsatisfactory  information 
available  that  almost  no  attempt  has  been  made  in  the  past  to 
establish  and  apply  principles  that  conform  to  generally  accepted 
standards  of  either  economics  or  ethics.  Rather  the  “ bargain 
method  ” has  been  in  almost  universal  use.  Under  such  circum- 
stances, the  stronger  interests  are  able  to  make  the  better  bargain 
and  the  weaker  interests  have  the  choice  of  taking  what  they  can 
get  in  the  exchange  of  securities  or  staying  out  at  their  peril. 
Quite  generally  weaker  interests  have  accepted  the  terms  offered 
rather  than  remain  independent  and  subject  themselves  to  the 
dangers  involved  in  such  a course. 

So  long  as  the  state  and  national  governments  pursue  their 
present  policy  of  discouraging  or  absolutely  prohibiting  con- 
solidations, such  conditions  must  of  necessity  continue.  When 
once  freedom  of  consolidation,  within  prescribed  limits,  shall  be 
recognized  to  be  one  of  the  conditions  necessary  for  the  main- 
tenance of  fair  competition,  the  government  may  well  expend  in 
some  other  way  a part  of  the  energy  it  is  now  using  in  pro- 
hibiting entirely  certain  classes  of  consolidations  and  in  pun- 
ishing consolidations  it  has  permitted  to  be  formed  in  the  past. 
It  is  to  be  hoped  it  will  take  such  action  as  may  be  found  neces- 
sary to  ensure  that  the  several  parties  entering  into  a legitimate 
consolidation  are  allotted  in  the  distribution  of  securities  the 
equivalent  of  the  share  which  they  have  severally  contributed 
to  its  corporation  assets  and  earning  power. 

Maurice  H.  Robinson. 


University  of  Illinois. 


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munications addressed  to  the  publishers,  Ginn  & Company, 
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Yearly  subscription,  three  dollars ; single  number,  seventy-five  cents.  Back 
numbers  and  bound  volumes  can  be  obtained  from  the  publishers. 


